French liberal think tank IREF has called for the introduction of pension funds in France, saying the country’s pay-as-you-go system is not fit for purpose.

The think tank (Institut de Recherches Economiques et Fiscales) said the French pension system was very unequal, with the public regime privileged and financed by taxpayers, while the private sector, in the absence of reform, was heading for failure.

It argued that a funded pension pillar had been introduced in almost every other developed, democratic country, noting that pension funds only represented around 0.4% of GDP in France, versus 149% in the Netherlands.

The think tank is calling for the introduction of “proper” pension funds in France.

“Just as for unemployment, ‘we have tried everything’ in pensions … except what works,” said IREF.

It said an agreement reached for the supplementary pension schemes for private sector workers, Agirc-Arcco, only amounted to a superficial patching up of a regime that was structurally in deficit and could be hard hit by a new recession.

It said France was “ideologically attached” to the pay-as-you-go system (système par repartition), pointing to its incorporation in legislation, but argued that the current situation could not continue for much longer.

It acknowledged that pension funds were subject to the fluctuations of the markets but said they had recovered from the 2008 crisis.

It cited OECD figures of an average real return of 5.7% in 2012, as well as a study by Thomas Piketty, which the think tank said showed returns in a funded pension system were much higher than those in a pay-as-you-go system.

IREF also argued that pension funds benefited the economy by acting as a source of lending and investment.

Harnessing pension assets for the benefit of the domestic economy is a major motivation behind a law put forward by the French Finance Ministry in March, which proposes regulating pension assets managed by insurers under the IORP framework rather than Solvency II.

There are some pension funds in France – such as that for civil servants, ERAFP – but the system is predominantly pay-as-you-go, and, outside that, pension provision is mainly insurance-based.

IREF has also proposed changes to France’s insurance-based pension provision, calling for the creation of a personal pension account (Compte Personnel Retraite).

Individuals could choose to funnel their first and second-pillar contributions to their account for investment, or remain within the pay-as-you-go system.